tea - All posts tagged tea

Investors don’t seem to be brewing up much enthusiasm for news that coffee house giant Starbucks (SBUX) is spending $620 million in cash to buy Teavana Holdings (TEA), the operator of a chain of 300 mall-based specialty tea shops.

At $48.58, Starbucks fell 0.5% during afternoon market action, which while a pretty muted response, is certainly not a ringing endorsement.

But Starbucks CEO Howard Schultz is looking to sustain revenue growth by moving beyond his coffee house roots. And Teavana is another brick in the road, which has included instant coffee, energy drinks, juice, a single-serve brewer and food to sell in its shops and in grocery stores. Credit Suisse analyst Keith Siegner writes…

A somewhat different strategy than prior acquisitions: SBUX’s last few initiatives/acquisitions focused on channel proliferation (e.g. K-cups) and products that enhance the store experience while also creating opportunities for CPG proliferation. Purchase of Teavana represents a very different tack, with the chance that its products never even make it to SBUX stores. Instead, SBUX wants to translate its success in serving beverages, growing retail stores, international development and CPG into a tangential product/store.

Starbucks already owns the Tazo tea business, which accounts for roughly $1 billion in sales. Starting last year, it bought Evolution Fresh for $30 million and Bay Bread LLC for $100 million. Starbucks is also expanding its retail presence in the U.S. beyond its namesake cafes with a Tazo shop and plans to take its Seattle’s Best Coffee locations nationwide.

But Lazard Capital Markets analyst Matthew DiFrisco expects reaction to the Teavana acquisition to remain muted until Starbucks can “…demonstrate its ability to leverage the Teavana brand through its CPG and retail channels.”

Starbucks is scheduled to host an investor meeting on Dec. 5. In the mean time, analysts published a host of research notes detailing the deal’s benefits and shortcomings.

Jefferies analyst Andy Barish sees the acquisition adding a penny per share to fiscal 2013 earnings, and adding even more the following year. In fact, he writes that Starbucks “can own the tea category like they do coffee.”

It’s a big market. BMO analyst Phillip Juhan estimates that tea is a $40 billion global opportunity. But he does worry that at 14 times EV/EBITDA, the Teavana acquisition is a bit expensive, too small to have an immediate impact and drains a big chunk of Starbucks’ $2 billion cash position.

Still, Juhan still rates Starbucks at Outperform rating with a $60 price target.

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